11/05/2002 @ 1:19PM

The Pritzkers' Superior Headache

Who’s to blame for the failure of Superior Bank, the Illinois thrift half-owned by the Pritzker family?

Depends on whom you ask. On Nov. 1 the Federal Deposit Insurance Corp. pointed the finger at Ernst & Young, Superior’s auditor, in a fraud suit filed in federal court here. But that action comes two months after a group of Superior depositors accused the bank’s owners and directors, including two members of the Pritzker family, of racketeering, claiming they lined their pockets with money looted from Superior savings accounts.

Superior, a suburban Chicago savings and loan, collapsed in early 2001 under the weight of half a billion dollars in subprime loan defaults and improper accounting that had overstated the thrift’s assets by $420 million.

The FDIC’s allegation against Ernst & Young made big headlines over the weekend. It seeks $2 billion in damages and claims the firm hid accounting errors at Superior to avoid a scandal that might have interfered with the $11 billion sale of Ernst & Young’s consulting group in June 2000. But the FDIC’s complaint doesn’t implicate Superior’s owners or management. In fact, it goes out of its way to sing the Pritzkers’ praises and doesn’t mention that the family will reap 25% of whatever the FDIC recovers from Ernst & Young.

T hat contrasts starkly with the allegations made in the racketeering suit filed in Illinois state court in August and removed to federal court here last week. The suit, filed by three Superior depositors on behalf of 1,406 individuals who had accounts there, names Thomas Pritzker and cousin
Penny
Pritzker
Penny Pritzker
as defendants, along with 10 other executives and co-owners, plus Ernst & Young. The plaintiffs are trying to recover $20 million in lost deposits.

“We think they ought to make the depositors whole, then the principals can fight over whatever scraps are left,” says Clint Krislov, the attorney representing the depositors.

Stephen Novack, the Chicago lawyer representing all the defendants in the racketeering case except Ernst & Young, says the claims have no merit. Next week he will ask the court to dismiss the case. Ernst & Young did not return calls seeking comment.

The plaintiffs, whom the complaint describes as “conservative and unsavvy investors,” say they were induced to buy certificates of deposit worth at least $100,000 with the assurance that their savings would be federally insured. But, they claim, many of those accounts were not properly insured, leaving them with no recourse when the bank went belly-up last year.

In the meantime, the complaint alleges, the thrift’s directors were sucking money out of the thrift by collecting dividends totaling $200 million on Superior’s earnings–earnings that, as it turned out, didn’t exist. The bulk of those dividends–$188 million–was paid to Coast-to-Coast Financial, the holding company that owned Superior and was controlled by Tom Pritzker and business partner
Alvin
Dworman
Alvin Dworman
. That would’ve more than quadrupled the $42.5 million the Pritzkers and Dworman paid for Superior in 1988. Tom Pritzker also runs Hyatt, which the family reportedly has been prepping for an initial public offering (see “Shaking The Family Tree” and Readers Say), as well as the family’s investments in
Royal Caribbean Cruises
.

The Superior investment looked like another Pritzker triumph until Superior blew up two years ago. After the collapse, it looked as if they’d be coughing up most of their winnings. Last December the family cut a settlement deal with the FDIC, agreeing to pay $100 million upfront and another $360 million over 15 years.

But don’t count the Pritzkers out yet. In a bizarre twist, the Pritzkers could conceivably turn a profit if the agency wins its lawsuit against Ernst & Young. The family stands to collect 25% of any money the FDIC collects, as negotiated in the December settlement agreement.

Even beyond that, the FDIC seems to be going out of its way to appease the Pritzkers. The agency’s complaint against Ernst & Young includes two long, obsequious, seemingly irrelevant paragraphs detailing the Pritzkers’ philanthropic efforts in Chicago and lauding the family business as “one of this country’s most successful financial enterprises.”

The complaint makes no mention of the dividends paid to the principals or of previous FDIC testimony before Congress blaming Superior’s management and directors for the thrift’s failure. That should give caution to the depositors if they’re expecting the FDIC’s help in recovering the money they lost at Superior.